Statement of. Management s. relying on some. the. Responsibility. independent. Benoit La Salle, FCA

Transcription

1 Management s Statement of Responsibility The consolidated financial statements of the Corporation and all information in this report are the responsibility of management and have been approved by the Board of Directors. The consolidated financial statementss have been prepared in accordance with Canadian generally accepted accounting principles, which recognize the necessity of relying on some best estimates and informed judgments. All financial information in this report is consistent with the information in the consolidated financial statements. The Corporation maintains appropriate systems of internal control to give reasonable assurance that assets are safeguarded from loss or misuse and financial records are properlyy maintained to provide reliable information for the timely and accurate preparation of financial statements. PricewaterhouseCoopers LLP, Chartered Accountants, are appointed by the shareholders and conducted an audit on the Corporation s consolidated financial statements. Their report is included herein. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The Board of Directors carries out this responsibility principally through its Audit Committee. The Audit Committee is comprised entirely of independent directors and meets annually with management and with the Company s external auditors to discuss the results of their audit examination and to review issues related thereto. The external auditors have full access to the Audit Committee with and without the presence of management. The Audit Committee reviews the consolidated financial statements and Management s Discussion and Analysis and recommends their approval to the Board of Directors. Benoit La Salle, FCA President and Chief Executive Officer Martin Milette, CA, CPA Chief Financial Officer

2 Independent Auditor s Report To the Shareholders of SEMAFO Inc. We have audited the accompanying consolidated financial statements of SEMAFO inc., which comprise the consolidated balance sheetss as at 9 and the consolidated statements of operations, comprehensive income, retained earnings and cash flows for the years then ended, and the related notes including a summary of significant accounting policies. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidatedd financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidatedd financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on thesee consolidatedd financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentationn of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectivenesss of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of SEMAFO inc. as at and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Montreal, Canada March 15, Chartered accountant auditor permit No

3 Consolidated Balance Sheets As at (Expressed in thousands of U.S. dollars) Assets Current assets Cash on hand ,439 Restricted cash (note 8)... 3,750 Accounts receivable... 6,021 Inventories (note 4)... 68,952 Other short-term assets (note 5)... 5, ,400 Restricted cash Property, plant and equipment (note 6) ,413 Investment and other assets (note 7)... 19,600 Liabilities Current liabilities Accounts payable and accrued liabilities... Income tax payable... Current portion of long-term debt (note 8)... Long-term debt ( note 8)... Advance payable (note 9) ,070 36,789 21,231 14,824 72,844 3,007 62,481-9,894 60,300 4, ,231 4, ,375 19, ,756 33,658 5,019 18,808 57,485 15,612 3,007 Asset retirement obligations (note 10)... Future income taxes (note 14)... 7,008 3,023 85,882 5,879 7,110 89,093 Non-controlling interest... 1,752 - Shareholders Equity Share capital (note 11) , ,759 Contributed surplus (note 12) Retained earnings (Deficit)... 8,053 33, , ,070 5,998 (63,094) 272, ,756 Commitments (note 16) Approved by the board of directors, Jean Lamarre, Director Benoit La Salle, FCA, Directorr 1

4 Consolidated Statements of Retained Earnings (Deficit) and Comprehensive Income For the years ended (Expressed in thousands of U.S. dollars) Consolidated Retained Earnings (Deficit) Balance beginning of the year... (63,094) (104,387) Share issue expense (note 11)... (6,311) (2,212) Net income for the year ,246 43,505 Balance end of the year... 33,841 (63,094) Consolidated Comprehensive Income Net income and Comprehensive income for the year ,246 43,505 2

5 Consolidated Statements of Operations For the years ended (Expressed in thousands of U.S. dollars) Revenue Gold sales , ,788 Expenses Mining operations , ,795 Government royalties... 12,712 9,470 Amortization of property, plant and equipment... 41,931 40,863 Administration... 17,145 14,367 Accretion expense of asset retirement obligations , ,883 Operating income ,873 60,905 Charitable donations Fondation SEMAFO... 1, Interest, banking fees and other income Interest on long-term debt... 2,728 4,947 Stock-based compensation... 3,525 1,337 Change to the fair value of derivative financial instruments (note 13) ,383 Write-down of exploration property Datambi project (note 6 b) Gain on settlement of advances payable (note 9)... (3,537) Foreign exchange gain... (3,923) (509) Net income before income taxes and non-controlling interest ,202 54,380 Income tax expense (recovery) (note 14) Current... 23,776 5,019 Future... (3,572) 5,856 20,204 10,875 Non-controlling interest... 1,752 - Net income for the year ,246 43,505 Basic net income per share (note 15) Diluted net income per share (note 15)

6 Consolidated Statements of Cash Flows For the years ended (Expressed in thousands of U.S. dollars) Cash flows from : Operating activities Net income for the year ,246 43,505 Adjustment for : Change to fair value of derivative financial instruments ,383 Amortization of property, plant and equipment... 41,931 40,863 Stock-based compensation... 3,525 1,337 Accretion expense of asset retirement obligations Amortization of deferred transaction costs Gain on settlement of advances payable... (3,537) Write-down of exploration property Unrealized foreign exchange gain... (549) (346) Non-controlling interest... 1,752 - Future income taxes (recovery) expense... (3,572) 5, ,451 92,147 Changes in non-cash working capital items and settlement of liabilities related to asset retirement obligations (note 17 a)... 12,311 (6,984) Financing activities 159,762 85,163 Reimbursement of long-term debt... (20,065) (26,951) Settlement of advances payable... (3,000) Issuance of share capital ,313 35,713 Share issue expenses... (6,311) (2,212) Investing activities 94,937 3,550 Additions to property, plant and equipment... (96,741) (35,084) Financial instruments settled... (15,483) Decrease in restricted cash (96,741) (49,674) Change in cash on hand during the year ,958 39,039 Cash on hand beginning of year... 62,481 23,442 Cash on hand end of year ,439 62,481 Supplementary cash flow information (note 17) 4

7 1. Incorporation and nature of activities SEMAFO inc. is incorporated under Part IA of the Quebec Companies Act. As from February 14, 2011, SEMAFO inc. (the Corporation ) became a business corporation governed by the Business Corporation Act (Québec). The Corporation and its subsidiaries are engaged in gold mining activities including exploration, development and operations. These activities are conducted in West Africa. The Corporation and its subsidiaries presently own and operate three gold mines in Burkina Faso, Niger and Guinea. The Corporation and its subsidiaries have interests in mining properties. The potential for recovery of costs incurred on these properties and of related deferred charges depends on the existence of sufficient quantities of reserves, obtaining all required permits, the Corporation s ability to obtain appropriate financing to put these properties into production, and the ability to realize a profitable return for the Corporation. 2. Significant accounting policies The U.S. dollar is the functional currency used to measure the Corporation s operations. These consolidated financial statements (the financial statement ) have been prepared in U.S. dollars and in accordance with Canadian generally accepted accounting principles ( GAAP ). Basis of consolidation The actual consolidated financial statements of the Corporation include its accounts and those of all its subsidiaries held directly or indirectly. All intercompany transactions and balances have been eliminated. Use of estimates The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to estimated recoverable ounces of gold, useful life of assets for amortization purposes and for evaluation of their net recoverable amount, provision for site restoration costs, calculation of stock-based compensation expenses, income tax valuation allowances, contingent liabilities and income tax liabilities and valuation of warrants. Actual results could differ from those estimates. Cash and cash equivalents Cash and cash equivalents are classified as held for trading and are valued at their fair market value. Cash and cash equivalents include all cash on hand and balances with banks as well as all highly liquid short-term investments with original maturities of three months or less. Portfolio investments Portfolio investments are classified as assets available for sale. Equity investments that are not traded in an active market are recorded at cost. At the time of a sale or an other than temporary decline in value of portfolio investments, the gains or losses resulting from these transactions and events are recorded in net earnings. 5

8 2. Significant accounting policies (continued) Inventories Gold (doré bars and gold in circuit) is valued at the lower of cost and net realizable value. Cost is evaluated using the first-in, first-out method ( FIFO ). Supplies, spare parts and ore in stockpiles are valued at the lower of cost and realizable value. Cost is evaluated using the average cost method. Property, plant and equipment i) Property acquisition costs, deferred exploration and development costs When a project is put into commercial production, property acquisition costs and deferred exploration and development costs are transferred to the various property, plant and equipment categories. Amortization is calculated using the units of production method over the expected operating life of the mine based on estimated recoverable ounces of gold. Estimated recoverable ounces of gold include proven and probable reserves and non-reserve material when sufficient objective evidence exists to support a conclusion that it is probable that the non-reserve material will be produced. Exploration costs incurred on a property in production are capitalized in property, plant and equipment. ii) Buildings and equipment related to mining production Buildings and equipment related to mining production are recorded at cost and amortized, net of residual value, using the units of production method over the expected operating life of the mine based on estimated recoverable ounces of gold. However, if the anticipated useful life of the assets is less than the life of the mine, amortization is based on their anticipated useful life. iii) Rolling stock, mining equipment, communication and computer equipment Rolling stock, mining equipment, communication and computer equipment are recorded at acquisition cost. Amortization is provided for using the declining balance method at a rate of 30%, with the exception of amortization of the mining equipment, which is calculated according to the hours-of-use method based on its estimated useful life. The amortization expense remains capitalized for mining assets not in production and will be recognized in the consolidated statement of operations gradually as the mining properties are put into commercial production. iv) Stripping costs incurred in the production phase of a mining operation The stripping costs are accounted for as variable production costs to be included in the costs of inventory produced during the period in which they are incurred. Stripping costs are capitalized when the stripping activity can be shown to be a betterment of the mineral property. Capitalized stripping costs are amortized in a rational and systematic manner over the reserves that directly benefit from specific stripping activities. 6

9 2. Significant accounting policies (continued) Exploration properties Exploration properties comprise mining rights and deferred exploration and development expenses on properties at the exploration and development stages and are recorded at acquisition cost or at their fair value in the case of a devaluation caused by an impairment of value. Mining rights, deferred exploration and development expenses, and options to acquire undivided interests in mining rights are amortized only as these properties are put into production. Exploration properties are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the assets may not be recoverable, as identified by comparing their net book value to the estimated undiscounted future cash flows generated by their use and eventual disposal. Impairment is measured as the excess of the carrying value over the fair value, determined principally by discounting the estimated net future cash flows expected to be generated from the use and eventual disposal of the related asset. In the event that the Corporation has insufficient information about its exploration properties to estimate future cash flows to test the recoverability of the capitalized costs, the Corporation will test for impairment by comparing the fair value to the carrying amount, without first performing a test for recoverability. Expenditures not related to specific properties are accounted for in the statement of operations. Costs related to properties put into production are transferred to property, plant and equipment. Proceeds on the sale of metals are credited to exploration properties during the start-up period. These revenues are based on realized prices for metals and are recorded when the metals are sold. Proceeds on the sale of exploration properties are applied to reduce the related carrying costs; any excess is reflected as a gain in the consolidated statement of operations. Losses on partial sales are recognized and reflected in the consolidated statement of operations. Capitalization of interest costs Interest is capitalized when it serves to finance acquisitions, projects in the development stages and construction of mining projects. The capitalization ceases as soon as the asset is ready for its intended use. The interest is recognized in the consolidated statement of operations when it is used to finance a project in the development stage. Impairment of long-lived assets The Corporation periodically assesses the carrying amount of its long-lived assets based on the future cash flow method. Net estimated future cash flows, on an undiscounted basis, from each mine and mining project are calculated based on estimated recoverable ounces of gold, estimated future metal price realization and operating, capital and site restoration expenses. If it is determined that the net recoverable amount of long-lived assets is less than their carrying value, a write-down to fair value, determined by using discounted future cash flows, is made with a corresponding charge to operations. Management s estimate of future cash flows is subject to risks and uncertainties. Therefore, it is reasonably possible that changes could occur which may affect the recoverability of the Corporation s long-lived assets. Other financial instruments In the normal course of business, the Corporation uses financial instruments. All financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held for trading, available for-sale, held to maturity, loans and receivables, or other liabilities. Financial assets and financial liabilities classified as held for trading are required to be measured at fair value, with gains and losses recognized in net earnings. Financial assets classified as held to maturity, loans and receivables and financial liabilities (other than those held for trading) are required to be measured at amortized cost using the effective interest rate method of amortization. Available-for-sale financial assets are required to be measured at fair value, with unrealized gains and losses recognized in other comprehensive income. Investments in equity instruments classified as available-for-sale that do not have a quoted market price in an active market should be measured at cost. 7

10 2. Significant accounting policies (continued) Other financial instruments (continued) The Corporation implemented the following classifications: Accounts receivable, other short-term assets and restricted cash are classified as loans and receivables; Accounts payable and accrued liabilities, long-term debt and advances payable are classified as other financial liabilities; Investments are classified as available-for-sale; Deferred transaction costs are recorded as a reduction of long-term debt and amortized according to the effective interest rate method. Revenue recognition The Corporation records revenue when the following conditions are met: persuasive evidence of an arrangement exists; delivery has occurred under the terms of the arrangement; the price is fixed or determinable; and collectability is reasonably assured. Incidental revenues from the sale of by-products, such as silver, are classified as a reduction of operating expenses; these incidental revenues are not significant. Derivative financial instruments Derivative financial instruments must be recorded on the balance sheet at fair value, including those derivatives that are embedded in the financial instrument or other contract but are not closely related to the host financial instrument or contract. Changes in the fair values of derivative financial instruments are required to be recognized in net earnings, except for derivatives that are designated as cash flow hedges, in which case the fair value change for the effective portion of the hedge relationship is required to be recognized in Other comprehensive income. Income taxes The Corporation provides for income taxes using the liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities using substantially enacted income tax rates in effect for the year in which the differences are expected to reverse. The Corporation establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the assets will not be realized. Foreign currency transactions and integrated foreign subsidiaries The financial statements of integrated foreign operations and transactions denominated in currencies other than the functional currency are translated into the functional currency using the temporal method. Under this method, monetary assets and liabilities in foreign currencies are translated into the functional currency at exchange rates in effect at the balance sheets date. Non-monetary assets and liabilities are translated at historical rates, unless such assets and liabilities are carried at market, in which case, they are translated at the exchange rate in effect at the date of the balance sheets. Revenues and expenses denominated in foreign currencies are translated at the rate of exchange prevailing on each transaction date. Gains and losses on translation are included in the consolidated statements of operations. Stock-based compensation plan The Corporation accounts for all stock-based compensation using the fair value method. This method consists of recording expenses to earnings over the vesting period of the options granted and the counterpart is accounted for in contributed surplus on the balance sheets. The fair value is calculated based on the Black-Scholes valuation model. When stock options are exercised, any consideration paid is credited to share capital. 8

11 2. Significant accounting policies (continued) Asset retirement obligations The total amount of the estimated cash flow required to settle the obligations arising from environmental regulatory closure and post-closure plans is discounted based on the credit-adjusted risk-free rate and is recorded as a liability. By way of compensation, the total discounted estimated cash flow is capitalized to property, plant and equipment and amortized in rational and systematic manner. The asset retirement obligations recorded are adjusted for accumulated accretion in accordance with the expected timing of cash flow payment required to settle these obligations and liabilities to be paid off. 3. Accounting policies modification SEMAFO will cease to prepare its consolidated financial statements in accordance with Canadian GAAP as set out in Part V of the CICA Handbook - Accounting ("Canadian GAAP") for the periods beginning on January 1, 2011 when it will start to apply International Financial Reporting Standards as published by the International Accounting Standards Board as set out in Part I of the CICA Handbook Accounting as its primary basis of accounting. Consequently, future accounting changes to Canadian GAAP are not discussed in these consolidated financial statements as they will normally never be applied by the Corporation. 4. Inventories Doré bars... 1,789 1,053 Gold in circuit... 6,294 8,547 Stockpiles... 7,727 10,675 Supplies and spare parts... 53,142 40,025 68,952 60,300 The cost of inventory that was charged to expenses represents mostly mining operation expenses and essentially all of the amortization of property, plant and equipment. 5. Other short-term assets Prepaid expenses and other... 5,238 4,554 Fair value of derivative financial instruments (note 13) ,238 4,556 9

12 6. Property, plant and equipment Cost Accumulated depreciation Net Cost Accumulated depreciation Net Property, plant and equipment producing properties: Property acquisition costs, deferred exploration and development costs.. 193,417 88, , ,276 69, ,236 Buildings and equipment related to mining production ,132 48,531 98, ,713 35,767 73,946 Mining equipment... 53,610 15,462 38,148 26,425 9,843 16,582 Rolling stock, communication and computer equipment... 10,195 6,976 3,219 8,640 6,081 2,559 Stripping costs (a)... 16,036 3,828 12,208 3,694 1,642 2,052 Total property, plant and equipment , , , , , ,375 As from April 1,, the Corporation reassessed the expected operating life of one mine. This is a change to the accounting estimate resulting from new information and, therefore, requires prospective application from April 1,. Since the quantities of reserves and resources significantly differ from the previous base used, this resulted in reducing the amortization expense for. The amortization base is updated on an annual basis based on the technical report in compliance with National Instrument Standards of Disclosure for Mineral Projects. a) Reconciliation of stripping costs is as follows: Balance beginning of year... 2,052 1,155 Stripping costs capitalized... 12,342 2,087 Amortization... (2,186) (1,190) Balance end of year... 12,208 2,052 b) Exploration properties comprise wholly-owned mining rights, undivided interests in properties and deferred exploration and development costs. The following table sets forth the evolution of the costs capitalized to exploration properties: Balance beginning of year Write-down of Datambi Project... (827) Balance end of year... In, the Corporation made a revaluation of the Datambi project and decided to write-down the project for an amount of 827,

13 7. Investment and other assets Investment in GoviEx and a related company of GoviEx, at cost... 19,600 19,600 Fair value of derivative financial instruments (note 13) ,600 19, Long-term debt Long-term debt consists of the following: Bank loan of 20,000,000 1)... 3,750 Term facility of 45,000,000, bearing interest at 7.62% payable quarterly, principal repayable in twelve equal quarterly installments starting March 31,. The facility is secured by a pledge of shares of a subsidiary and a pledge of assets. The facility is also secured by pledges and assignments of bank accounts, inter company advances and other intangibles. 2)... 15,000 30,000 Other loans (denominated in euros, bearing interest at rates between 8.85% and 10.00%) Historical amount... 1,315 Exchange rate fluctuation Long-term debt... 15,000 35,099 Deferred transaction costs... (176) (679) Long-term debt, net of deferred transaction costs... 14,824 34,420 Current portion of long-term debt... 14,824 18,808 Long-term portion of long-term debt... 15,612 1) 2) On December 31,, the Corporation prepaid 3,750,000 originally due on December 31,. The Corporation is required to maintain a cash balance of 3,750,000 in a distinct account until the full repayment of the term facility. 11

14 9. Advances payable Under the mining agreement, the Republic of Niger is entitled to receive a reimbursement for its exploration costs previously incurred on the Samira Hill project. These costs will be repaid from the operating surplus of the subsidiary, the owner of the Samira Hill permit. The 3,007,000 advance is non-interest bearing. In June, the Corporation acquired from Etruscan Resources Inc. their minority interest in the subsidiary operating the Samira Hill mine located in Niger. The Corporation now holds an 80% interest in the subsidiary with the balance held by the government of Niger. Etruscan's 40% participation in the operating subsidiary, comprised of preferred shares, loans and common shares, was purchased for 3,000,000 along with a 1.5% net smelter royalty. The royalty comes into effect after which time the mine has produced 750,000 ounces, calculated as from July 1,. The Corporation has been granted a right of first refusal should Etruscan decide to sell this royalty. This transaction led to a gain on settlement of advances payable of 3,537, Asset retirement obligations The Corporation s operations are governed by mining agreements covering the protection of the environment. The Corporation conducts its operations in such a manner as to minimize the impact of the operations on the environment. The Corporation will implement progressive measures for rehabilitation work during the operation, closing down and follow-up work upon closing of the mines, in accordance with its mining agreements. Consequently, the Corporation accounted for its asset retirement obligations of the mining sites using cost estimates. Those estimates are subject to changes following modifications to laws and regulations or as new information becomes available. The table below presents the evolution of asset retirement obligations for the year. Balance beginning of year... 5,879 4,846 Increase due to accretion expense New liabilities Liabilities paid off... (27) (21) Balance end of year... 7,008 5,879 The estimated undiscounted cash flow required to settle the asset retirement obligations is 8,921,000 (8,262,000 in ). Those disbursements are expected to be made during the years 2011 to An 8% discount rate was used to evaluate those obligations. 12

15 11. Share capital Authorized Unlimited number of common shares without par value Unlimited number of Class A preferred shares, no par value, non-voting, non-participating and redeemable at the option of the holder at a price of 0.33 (CA 0.33) per share Unlimited number of Class B preferred shares, no par value, non-voting, non-participating and redeemable at the option of the Corporation at a price of 0.12 (CA 0.12) per share Movements in the Corporation s share capital are as follows: Number (in thousands) Amount Number (in thousands) Amount Common shares Balance beginning of year , , , ,455 Issued and paid in cash... 17, ,018 17,850 35,237 Issued for exercises of options... 2,325 6, Issued for exercises of warrants... 1,800 5,055 Balance end of year , , , ,304 Warrants Balance beginning of year... 1,800 1,455 1,800 1,455 Exercised... (1,800) (1,455) Balance end of year... 1,800 1,455 Common shares and warrants , , , ,759 On June 4,, the Corporation closed a public offering of 17,250,000 common shares at 6.55 (CA 6.95) per share for gross proceeds of 113,018,000 (CA 119,887,500). Share issue expenses related to this public offering, totaling 6,311,000 were debited to retained earnings. On June 23,, the Corporation closed a public offering of 17,850,000 common shares at 1.97 (CA 2.27) per share, for gross proceeds of 35,237,000 (CA 40,519,500). Share issue expenses related to this public offering totaled 2,212,000. Warrants All 1,800,000 warrants were exercised on July 21,, for gross proceeds of 3,600,000 (CA 3,800,000). 13

16 11. Share capital (continued) Options The Corporation has two stock option plans for its employees, officers, consultants and directors and those of its subsidiaries; the Stock Option Plan (the Original Plan ) and the Stock Option Plan (the Plan ). The Original Plan provides for the grant of non-transferable options for the purchase of common shares. The Board of Directors of the Corporation has the authority to select those employees, officers, consultants and directors to whom options will be granted, to determine the terms, limits, restrictions and conditions of the grants of options, to interpret the Original Plan and to make all decisions relating thereto, save and except for amendments that require shareholder approval. The option price shall not be lower than the closing price of the Corporation s common shares on the Toronto Stock Exchange on the last trading day before the day on which the option is granted. The number of options that may be issued to a person pursuant to the Original Plan cannot exceed, at all times, 5% of the issued and outstanding shares. The option price is payable in full at the time the option is exercised. The options may be exercised during the option period determined by the Board of Directors, which may vary, but will not exceed ten years from the date of grant. The Corporation s shareholders adopted the Plan at the last Annual General and Special Meeting of the Shareholders. The Plan is similar to the Original Plan, but provides, among other things, for a five year option term instead of the 10-year option term provided under the Original Plan. Since the adoption by the Corporation s shareholders of the Plan, no further options have been granted nor will be granted under the Original Plan. There are 16,000,000 of the Corporation s common shares which may be issued pursuant to the exercise of share options granted under the Plans. Of this number, 4,202,000 shares were issued as at December 31, (1,877,000 as at December 31, ), leaving a balance of 11,798,000 shares available to be issued under the Plans ( 13,123,000). As at December 31,, the Corporation had issued options, allowing for the subscription of 9,948,000 common shares of its share capital. A total of 1,960,000 new options were issued to employees, officers, consultants and directors of the Corporation during the year ended December 31,. The fair market value of these new options is evaluated at 4,998,000. The following presents the assumptions used to establish the fair value assigned to the options issued using the Black-Scholes valuation model: Average dividend per share... 0% 0% Average forecasted volatility... 60% 60% Average risk-free interest rate % 2.19% Average expected life... 5 years 5 years Fair value weighted average of options issued For the year ended December 31,, the total expense for the stock-based compensation was 3,525,000, compared to 1,337,000 in. The counterpart for those costs was credited to contributed surplus. The stock-based compensation cost was calculated according to the weighted average fair value of options issued based on the Black-Scholes valuation model using the assumptions shown above and considering the vesting requirements. A total of 2,325,000 options were exercised during under the Plans for a cash consideration of 4,695,000. An amount of 1,470,000 from these options has been reclassified from contributed surplus to share capital. In, for the same period, a total of 307,000 options were exercised under the Plans for a cash consideration of 476,000. An amount of 136,000 from these options has been reclassified from contributed surplus to share capital in. 14

17 11. Share capital (continued) The following table sets forth the options granted to employees, officers, consultants and directors under the Plans: Number of options Weighted average exercise price Number of options Weighted average exercise price (in thousands) () (in thousands) () Balance beginning of year... 10, (CA 2.02) 7, (CA 1.81) Forfeited... (125) 2.02(CA 2.01) (437) 1.67 (CA 1.75) Exercised... (2,325) 2.02(CA 2.01) (307) 1.55 (CA 1.67) Issued... 1, (CA 5.01) 3, (CA 2.37) Balance end of year... 9, (CA 2.59) 10, (CA 2.02) Options exercisable end of year... 4, (CA 2.02) 4, (CA 1.92) 15

18 11. Share capital (continued) Options outstanding Options exercisable Weighted Weighted Options Average average average residual exercise Options exercise outstanding life span price/option exercisable price/option Range of exercise prices (in thousands) (in years) () (in thousands) () 0.94 (CA 0.93) to 1.38 (CA 1.37) 1, (CA 1.28) (CA 1.27) 1.41 (CA 1.40) to 1.70 (CA 1.69) 1, (CA 1.55) (CA 1.55) 1.79 (CA 1.78) to 2.04 (CA 2.03) 2, (CA 2.01) (CA 1.99) 2.17 (CA 2.16) to 2.87 (CA 2.85) 1, (CA 2.39) 1, (CA 2.44) 3.97 (CA 3.95) to 8.79 (CA 8.74) 2, (CA 4.78) (CA 4.36) 9, (CA 2.59) 4, (CA 2.02) Capital risk management Capital is defined as shareholders equity plus long-term debt and advances payable, net of cash. As at December 31, As at December 31, Long-term debt and advances payable... 17,831 37,427 Less cash on hand ,439 62,481 (202,608) (25,054) Shareholders equity , ,663 Total capital , ,609 The Corporation s capital risk management objectives are as follows: a) Safeguard the Corporation s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders to maintain an optimal capital structure to enhance shareholder value in the long-term. b) Ensure sufficient capital in order to meet short-term business requirements and pursue the development of its mining projects and operations. c) Meet external capital requirements on its loans. d) Maintain an optimal capital structure and reduce the cost of capital. The Corporation s objectives remain unchanged from. As a growing business, the Corporation requires extensive capital. The Corporation raises capital, as necessary, to meet the need and take advantage of opportunities and, therefore, does not have a defined numeric target for its capital structure. The Corporation may use financial leveraging in order to maintain a balance of debt over equity. Based on its credit agreements, the Corporation is required to meet certain conditions and financial ratios, including debt to equity and debt service coverage. The Corporation is in compliance with these conditions and ratio requirements as at December 31,. 16

19 12. Contributed surplus The following table summarizes the changes in the Corporation s contributed surplus: Balance beginning of year... 5,998 4,797 Exercised options (note 11)... (1,470) (136) Stock-based compensation... 3,525 1,337 Balance end of year... 8,053 5, Financial instruments Gold sales contracts, gold purchases contracts and interest-rate swap In June, the Corporation closed-out its gold sales and gold purchases contracts. The Corporation no longer has derivative financial instruments of this nature. Put options In 2007, the Corporation implemented a 55,000 ounce gold price put protection program for the Mana Mine, a requirement under its 45,000,000 debt facility. As at December 31,, put options for 45,000 ounces are still outstanding and will expire in Consequently, the entire production is available to be sold at spot price and is fully exposed to any upward increase in the gold price with the downward price protected at 600 for all 45,000 ounces outstanding. Financial risk factors The Corporation s activities are exposed to financial risks: market risks, credit risk and liquidity risk. A. Market risks i) Fair value The put options did not qualify for hedge accounting. Consequently, changes in the fair value of these derivative financial instruments are recognized in net income. The Corporation recorded a loss of 145,000 during the year ended December 31, (a loss of 2,383,000 in ) following the change in the fair value of derivative financial instruments. The following table sets forth the changes in the fair value of the derivative instruments accounted for in the consolidated financial statements: Asset Fair value at beginning of year (calculated using a market price of 1,097 per ounce as at December 31, ) Changes to fair value recognized in results... (145) Fair value at end of year (calculated using a market price of 1,422 per ounce as at December 31, )... Short-term financial assets and liabilities are valued at their carrying amounts, which are reasonable estimates of their fair value due to their near-term maturities. The investment in GoviEx Uranium Inc. (formely Govi High Power Exploration Inc.), a private company, which is included in Investments and other assets, is valued at cost of 19,600,000 which is considered below its fair value. The carrying value of long-term debt bearing interest at fixed rates is considered to approximate its fair value given its short-term maturity date. 17

20 13. Financial instruments (continued) Financial risk factors (continued) A. Market risks (continued) ii) Fair value hierarchy The fair value hierarchy under which the Corporation s financial instruments are valued is as follow: Level 1 includes unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 includes inputs other than quoted prices included in Level 1 that are observable for the assets or liability, either directly or indirectly; and Level 3 includes inputs for the asset or liability that are not based on observable market data. As at December 31,, the only asset of the Corporation measured at fair value is the cash on hand which is classified as level 1. iii) Interest rate risk Current financial assets and financial liabilities are generally not exposed to interest rate risk due to their short-term nature or because they are non-interest bearing. The Corporation s interest bearing borrowings consists of fixed interest rate debt and is therefore not exposed to interest rate fluctuation and volatility. iv) Foreign exchange risk The operations of the Corporation in West Africa are subject to currency fluctuations and such fluctuations may materially affect the financial position and results of the Corporation. Gold is currently sold in US dollars and although the majority of the costs of the Corporation are also in US dollars, certain costs are incurred in other currencies. The appreciation of non- US dollar currencies against the US dollar can increase the cost of exploration and production in US dollar terms. The Corporation does not use derivatives to mitigate its exposure to foreign currency risk. The Corporation s balance sheet contains balances of cash on hand and restricted cash, accounts receivable as well as accounts payable and accrued liabilities, and long- term debt in currencies other than its reporting currency. The Corporation is thus exposed to a foreign exchange risk. The balances in currencies are as follows as at December 31, : CA Euro GNF CA Euro GNF Cash on hand and restricted cash... 14,522 13,910 2,333,236 1,403 5,679 2,620,502 Accounts receivable , ,608 3,058 Accounts payable and accrued liabilities... (4,452) (11,175) (12,556,412) (2,849) (8,838) (10,171,701) Long-term debt... (941) 10,552 6,598 (10,223,176) (1,166) (492) (7,548,141) US Equivalents... 10,609 8,836 (1,680) (1,114) (705) (1,532) Assuming that all other variables are constant, a variation of 10% in the Canadian dollar exchange rate would generate an impact of 964,000 on net income for the year ended December 31,. A variation of 10% in the Euro exchange rate would generate an impact of 803,000 on net income for the year ended December 31,. 18

21 13. Financial instruments (continued) Financial risk factors (continued) B. Credit risk Financial instruments that potentially subject the Corporation to credit risk consist of cash, restricted cash and accounts receivable. The Corporation offsets these risks by depositing its cash, including restricted cash, with high credit quality financial institutions. The Corporation only transacts with a highly rated counterparty for the sale of gold. In addition, the Corporation has receivables from different Governments in West Africa and receivable from a sales agent. As of December 31,, receivables from the government of Burkina Faso total 4,576,000 (4,955,000 in ). C. Liquidity risk Liquidity risk is the risk that the Corporation will not be able to meet its obligations as they fall due. The following are the contractual maturities of financial liabilities as at December 31, : Between 0 and 6 months Between 7 and 12 months Between 1 and 4 years Accounts payable and accrued liabilities... 36, Long-term debt... 7,996 7,716 44,595 7,906 The Corporation s growth is financed through a combination of cash on hand, cash flows from operations, borrowing, and the issuance of equity. One of management s primary goals is to maintain an optimal level of liquidity through the active management of assets and liabilities, as well as cash flows. 19

22 14. Income taxes The income tax expense of 20,204,000 ( - 10,875,000) are mainly attributable to the subsidiary operating the Mana Mine in Burkina Faso. The income tax balances are summarized as follows: i) The provision for income taxes presented in these financial statements is different from what would have resulted from applying the combined Canadian Statutory tax rate as a result of the following: Net income before income taxes and non controlling interest ,202 54,380 Combined federal and provincial income tax (: 29.90%, : 30.90%)... 37,435 16,803 Impact of income tax rate on future income tax balances... 2, Difference in tax rate of foreign subsidiaries... (12,967) (10,754) Non deductible expenses and/or non taxable portion of capital gain... 8, Other... (12,388) (696) 23,095 6,340 Valuation allowance... (2,891) 4,535 Income tax expense... 20,204 10,875 ii) Future income tax asset Future income tax asset Property, plant and equipment... 20,851 15,050 Share issue expenses... 2,136 1,292 Operating losses carried forward... 20,732 25,420 Deferred capital gain Derivatives instruments... 1,214 Unrealized foreign exchange losses ,030 Asset retirement obligations ,778 Intangible ,765 45,984 Valuation allowance... (39,234) (42,423) 7,531 3,561 Future income tax liability Unrealized foreign exchange gain... (4,179) (30) Investment... (2,482) (3,060) Property, plant and equipment... (3,893) (7,581) (10,554) (10,671) (3,023) (7,110) 20

23 14. Income taxes (continued) iii) The Corporation has accumulated non-capital losses for income tax purposes of approximately 74,645,000 of which 9,594,000 is taxed at 2.5% for subsidiaries in Barbados and the balance is taxed at a rate of between 26.9% and 35% and may be carried forward and used to reduce taxable income in future years. These losses may be claimed no later than: , , , , , , , , ,239 74,645 iv) The unamortized balance for tax purposes of share issue expenses in Canada amounting to approximately 7,939,000 will be deductible over the next four years, ending in Burkina Faso tax assessment The Corporation received, from the Burkina Faso tax authorities, at the end of the first quarter of, a tax assessment for the years 2007 and 2008 of 13,800,000 plus an additional 14,400,000 in penalties. During the fourth quarter of, the Corporation received confirmation that Burkina Faso tax authorities have dismissed the tax assessment and penalties issued to the Corporation in the first quarter of. The Corporation paid a total of 770,000 in lieu of the original amounts of 28,200,000. The amount owing was paid out and recorded as a tax expense in the fourth quarter, bringing this matter to a close for all parties. 21

24 15. Net income per share Net income for the year ,246 43,505 Weighted average number of outstanding common shares , ,124 Effect of dilutive stock options and warrants... 7,710 2,898 Average weighted number of outstanding diluted common shares , ,022 Basic income per share Diluted income per share Commitments Purchase obligations As at December 31,, the Corporation has purchase commitments related to the Mana plant expansion and the purchase of our new mining fleet totaling 1,148,000 and 9,313,000 respectively. Royalties The Corporation is subject to a royalty of 5.5% of the market value of gold ounces sold originating from the Samira Hill mine payable to the Republic of Niger. In, Government royalties amounting to 3,456,000 were paid ( 3,243,000)to the Government of Niger. The Corporation is subject to a royalty of 5% and of the market value of gold ounces sold originating from the Kiniero mine payable to the Republic of Guinea. In addition, the Corporartion has to invest 0.4% of its gold sales in local development projects. In, Government royalties amounting to 1,983,000 were paid ( 1,709,000) to the Governement of Guinea. During the first eleven months of, at our Mana Mine in Burkina Faso, the Corporation was subject to a royalty rate of 3%, which was calculated using the retail market value of gold ounces sold at the time of shipment. In December, the Government of Burkina Faso approved a new graduated royalty rate schedule based on the spot price of gold on the date of delivery. Under the new regime, gold spot prices lower or equal to 1,000 per ounce are subject to royalty fees of 3%, a 4% rate applies for spot prices between 1,000 and 1,300 per ounce, and a 5% royalty rate is applied on all shipments with a gold spot price greater than 1,300 per ounce. The new decree has been in effect since December 1,. In, Government royalties amounting to 7,273,000 were paid ( 4,518,000) to the Government of Burkina Faso. Further the acquisition from Etruscan Resources Inc. of their minority interest in the subsidiary operating the Samira Hill mine located in Niger, the Corporation is subject to a 1.5% net smelter royalty. The royalty comes into effect after which time the mine has produced 750,000 ounces, calculated as from July 1,. Since July 1,, the Samira Hill mine produced 77,100 ounces. The Corporation has been granted a right of first refusal should Etruscan decides to sell this royalty. 22